Ratings Recap: Mapfre/Commerce, Eurasia, Gulf Re, Central Re, Pioneer

June 6, 2008

Standard & Poor’s Ratings Services said that its ratings and outlook on Spain’s Mapfre S.A. (A+/Stable/–; core operating entities Mapfre Empresas, Compania de Seguros y Reaseguros, S.A. and Mapfre Re Compañía de Reaseguros, S.A. are rated AA/Stable/–) and on Massachusetts-based insurer Commerce Group Inc. (BBB/Stable/–), including its insurance subsidiaries Commerce Insurance Co. and Citation Insurance Co. (MA) (both rated A/Stable/–), are unaffected by the acquisition of Commerce by Mapfre. S&P also indicated: “While the ratings and outlook remain unchanged, the transaction will nevertheless weaken Mapfre’s capitalization in the short term (see “Mapfre Ratings Unaffected by Proposed Acquisition of Massachusetts-Based Insurer Commerce” and “Commerce Group Inc. And Operating Companies Ratings Affirmed; Outlook Remains Stable,” both published on Oct. 31, 2007, on RatingsDirect).” S&P expects Mapfre to address the weakening capitalization by returning capital adequacy to a level more supportive of the ratings by early 2009. However the rating agency warned: “Failure to achieve this may result in a negative rating action. A positive rating action on the existing Mapfre entities is viewed as unlikely over the rating horizon, while the ratings on Commerce may ultimately benefit from group support.”

Standard & Poor’s Ratings Services has assigned its ‘B+’ long-term counterparty credit and insurer financial strength ratings and its ‘kzBBB+’ Kazakhstan national scale rating to Kazakhstan-based insurer Eurasia Insurance Co. with a stable outlook. “The ratings reflect the significant economic and industry risks that can affect insurers and other financial institutions in the domestic Kazakh market,” explained credit analyst Victor Nikolskiy. “The high credit risk exposure to the currently troubled local banking sector, unproven adequacy of reserving, and the lesser concern that Eurasia’s financial flexibility and shareholder support have yet to be tested in adversity are also rating constraints.”
S&P also indicated: “These factors are mitigated by the company’s good, sustainable, and leading position in Kazakhstan’s–and, increasingly, the region’s–insurance and reinsurance markets; and good operating performance, evinced by the earnings of recent years. The company also implicitly benefits from the extensive business connections of its ultimate shareholder group (comprising wealthy and influential Kazakh businessmen) who have declared their long-term support for Eurasia and given some substance to this by forgoing an annual dividend in recent years.”

A.M. Best Co. has assigned a financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” to Gulf Reinsurance Limited, a newly capitalized Dubai-based reinsurer. The outlook assigned to both ratings is stable. Best said that in its opinion, “Gulf Re is likely to maintain strong risk-adjusted capitalization during the company’s initial years of operation, based on conservative performance forecasts and A.M. Best’s specific insurance start-up criteria. Gulf Re’s initial capital of $200 million has been provided 50 percent each by Gulf Investment Company and Arch Capital Group Ltd. (ACGL). Best added that it “believes the company will fully capitalize all operating profits up to at least 2013, which will be sufficient to maintain strong risk-adjusted capitalization as the company expands its business during these years. Additionally, a further $200 million of capital is available at the holding company and can be transferred to Gulf Re if required, enhancing the company’s capital flexibility.”

A.M. Best Co. has revised the rating outlook to positive from stable for Taiwan’s Central Reinsurance Corporation, and has affirmed Central Re’s financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-“. Best said the “ratings reflect Central Re’s strengthened risk-based capitalization, continuous improvement in risk management and stable operating performance. The ratings also recognize the company’s continued efforts in strengthening its overseas market presence in recent years.

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘B’ (Fair) and the issuer credit rating (ICR) of “bb” of New Zealand’s Pioneer Insurance Company Limited. Best also removed the ratings from under review with developing implications and assigned a stable outlook. “These rating actions follow the NZD 8.4 million (US$6.6 million) injection of funds over the past year, of which NZD 2.523 million (US$ 1.98 million) was in the form of convertible capital notes,” Best explained. “The ratings also reflect the substantial operation, management and corporate governance improvements that Pioneer’s new owner, the New Zealand Association of Credit Unions, has effected. However, Best said it “remains cautious of Pioneer’s ability to maintain its current weak business profile in light of the strong competition within its market niche. Nonetheless, A.M. Best expects Pioneer will maintain a favorable risk-adjusted capitalization and operating performance relative to its current rating level.”

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